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Step up in Basis

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Level 1

I have a client who's spouse died in 2017.  He now tells me he did not take a step up in basis on his depreciation.  Do I have to amend his returns to take the step up in basis for his rental (which was community property)?  It is my understanding that I  can update the depreciation on his next tax return and not worry about amending.  He is planning on

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Level 12

You "have to" tell your client that amending will save him taxes and give him an estimate of how much tax it would save him, as well as an estimate of how much your fees will be to amend.

After that, it is the client's choice whether or not to amend.  With a full step-up, it is likely that amending will save the client more tax than what you would charge for your fees, so the client will want to amend.

Level 11

@TaxGuyBill  With a full step-up, it is likely that amending will save the client more tax than what you would charge for your fees, so the client will want to amend.

Sheer conjecture.  Let's say it's a $20,000 step-up.  (I know, it could be $2,000 or $200,000, but we don't know.)  So over a year and a half (I'm assuming she died in mid-2017) it's about $1,000 more depreciation.  In a 22% tax bracket, that's a $220 difference.  Maybe a small amount of state tax, also.  You do amended returns for less than $100 a year?  I'll send you some clients.  

On the other hand, maybe the AGI is over $150K and we're just adjusting the carryover losses.  Does that require amended returns, I wonder?

The real advantage here is to reset the accumulated depreciation.  

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Level 12

Of course it is pure conjuncture.  But:

  • Statistically, most likely the step-up in significantly more than $20,000, which means significantly more tax savings.  Which is why I said it is "likely" that amending would save money.
  • "Small amount of State tax"?  In my State that could be 7.85%.  Not exactly small in my opinion.
  • Just because the full-year returns would be amended, does not mean it would pay to amend the partial year return.  You don't need to do the partial year if it isn't worth it.
  • The OP said the client "now" told him no step-up was taken, which I infer means the OP prepared one or more of the tax returns.  In which case, YES, my fee to amend a return that I already prepared would be fairly low.  The time it takes to change TWO numbers in the software (basis and land) and to print the returns for mailing is minimal.
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Level 11

@TaxGuyBill 

Of course it is pure conjuncture conjecture .  But:

  • Statistically, where are you finding statistics on the value of rental properties owned by decedents?  most likely the step-up in significantly more than $20,000, which means significantly more tax savings.  Which is why I said it is "likely" that amending would save money.
  • "Small amount of State tax"?  In my State that could be 7.85%.  Not exactly small in my opinion.  Statistically, it could be zero in Washington or Texas.
  • Just because the full-year returns there's only one full-year return involved -- 2018  would be amended, does not mean it would pay to amend the partial year return.  You don't need to do the partial year if it isn't worth it.
  • The OP said the client "now" told him no step-up was taken, which I infer means the OP prepared one or more of the tax returns.  I infer that someone else did those returns, because the OP  should have at least known that the wife died, and apparently knows that involves a step-up in basis.  In which case, YES, my fee to amend a return that I already prepared would be fairly low.  The time it takes to change TWO numbers in the software (basis and land) and to print the returns for mailing is minimal.
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Level 12

@EL wrote:

It is my understanding that I  can update the depreciation on his next tax return and not worry about amending.  


You can update that year's depreciation to be correct, but you can't fix the prior years unless you amend.

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Level 15

AND, your client will be dinged for that missed depreciation whether he amends or not.

Research "allowed or allowable" for the details.

Former Chump... umm.... AllStar.
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